Econ 2113: Vocabulary Flashcards for Chapters 1-4 (Mankiw & OpenStax)
Ch 1 – Intro
Scarcity: The fundamental economic problem of having seemingly unlimited human wants and needs in a world of limited resources.
Opportunity costs: The value of the next best alternative that must be foregone when making a choice.
Marginal benefit & Marginal cost: Marginal benefit is the additional satisfaction or utility received from consuming one more unit of a good or service; marginal cost is the additional cost incurred from producing one more unit of a good or service.
Markets: A place or system where buyers and sellers interact to exchange goods and services.
Market failure: A situation in which a market, left on its own, fails to allocate resources efficiently.
Positive externalities & Negative externalities: Positive externalities occur when the production or consumption of a good or service benefits a third party not directly involved in the transaction (e.g., education); Negative externalities occur when the production or consumption of a good or service imposes a cost on a third party not directly involved (e.g., pollution).
Inflation: A general increase in prices and a fall in the purchasing value of money.
Gains from trade: The benefits that people can achieve by specializing in certain activities and then trading with others.
Equity vs. efficiency: Equity refers to the fairness in the distribution of economic prosperity among the members of society; Efficiency refers to the property of society getting the maximum benefits from its scarce resources.
Role of Prices: Prices serve as signals that guide the allocation of resources in a market economy.
Rational decision makers: Individuals who systematically and purposefully do the best they can to achieve their objectives.
Standard of living: Refers to the level of wealth, comfort, material goods, and necessities available to a certain socioeconomic class or a certain geographic area.
Ch 2 – Thinking like an Economist
Microeconomics vs Macroeconomics: Microeconomics is the study of how households and firms make decisions and how they interact in specific markets; Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.
Positive vs Normative statements: Positive statements are descriptive and make claims about how the world is; Normative statements are prescriptive and make claims about how the world ought to be.
Market Economy vs Command Economy: A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services; A command economy is an economy in which the government makes all economic decisions.
Production Possibilities Frontier (PPF): A graph that shows the combinations of output that the economy can produce given the available factors of production and the available production technology.
Factors of production: The inputs used to produce goods and services (e.g., land, labor, capital, entrepreneurship).
Efficient vs Inefficient region: Points on the PPF are efficient, meaning the economy is getting all it can from the scarce resources available; Points inside the PPF are inefficient, meaning the economy is producing less than it could.
Possible vs Impossible regions: Points on or inside the PPF are possible; Points outside the PPF are impossible with current resources and technology.
Increasing marginal cost: As more of one good is produced, the opportunity cost of producing an additional unit of that good increases.
Typical shape of PPF; why does it have this shape?: Typically bowed out from the origin due to increasing opportunity cost, which arises because resources are specialized and not equally productive in all activities.
Opportunity cost shown on PPF: The slope of the PPF represents the opportunity cost of producing one good in terms of the other.
PPF shape note: typically bowed out due to increasing opportunity cost
Ch 3 – Gains from trade
Absolute advantage vs Comparative advantage (how do they differ?): Absolute advantage is the ability to produce a good using fewer inputs than another producer; Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer.
Calculating opportunity cost: Opportunity cost of good A = (Quantity of good B sacrificed) / (Quantity of good A gained).
Specialization (which activity to pursue?): Economic agents should specialize in producing the good for which they have a comparative advantage.
Gains from trade: who benefits? Trade allows individuals and countries to specialize in activities where they have a comparative advantage, leading to increased total production and consumption, benefiting all parties involved.
Imports vs exports: Imports are goods and services produced abroad and sold domestically; Exports are goods and services produced domestically and sold abroad.
Ch 4 – Supply and Demand
Market: A group of buyers and sellers of a particular good or service.
Competitive market: A market in which there are many buyers and many sellers, so each has a negligible impact on the market price.
Demand Curve: A graph of the relationship between the price of a good and the quantity demanded.
Law of Demand: The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises.
Quantity demanded: The amount of a good that buyers are willing and able to purchase at a specific price.
Change in demand vs change in quantity demanded (what’s the difference?): A change in demand refers to a shift of the entire demand curve (caused by non-price factors); A change in quantity demanded refers to a movement along the demand curve (caused by a change in the good's price).
What shifts the demand curve? (What doesn’t shift it?): Shifts are caused by changes in income, prices of related goods, tastes, expectations, and the number of buyers. A change in the good's own price causes a movement along the curve, not a shift.
Market Demand & Market Supply: Market demand is the sum of all individual demands; Market supply is the sum of all individual supplies.
Normal goods vs inferior goods (examples): Normal goods are goods for which, other things equal, an increase in income leads to an increase in demand (e.g., cars, brand-name clothing); Inferior goods are goods for which, other things equal, an increase in income leads to a decrease in demand (e.g., bus rides, ramen noodles).
Substitute goods vs complementary goods (examples): Substitute goods are two goods for which an increase in the price of one leads to an increase in the demand for the other (e.g., Pepsi and Coca-Cola); Complementary goods are two goods for which an increase in the price of one leads to a decrease in the demand for the other (e.g., coffee and sugar, cars and gasoline).
Supply Curve: A graph of the relationship between the price of a good and the quantity supplied.
What shifts the supply curve? (What doesn’t shift it?): Shifts are caused by changes in input prices, technology, expectations, and the number of sellers. A change in the good's own price causes a movement along the curve, not a shift.
Law of Supply: The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.
Quantity Supplied: The amount of a good that sellers are willing and able to sell at a specific price.
Change in supply vs change in quantity supplied (what’s the difference?): A change in supply refers to a shift of the entire supply curve (caused by non-price factors); A change in quantity supplied refers to a movement along the supply curve (caused by a change in the good's price).
Surplus vs. Shortage: A surplus (excess supply) occurs when quantity supplied is greater than quantity demanded; A shortage (excess demand) occurs when quantity demanded is greater than quantity supplied.
On a graph…find the Equilibrium Price & Equilibrium Quantity: These are found at the intersection of the demand and supply curves.
Equilibrium: intersection of demand and supplyD(P) = S(P), at price P^Q^